Supply Chain Operations Plug the $100 Million Gap

Supply chain executives need to play a bigger role in the development of the broader business strategy.

Brian Meadows and Herb Schul, Ernst & Young LLP | Apr 19, 2012

I have a $100 million budget gap. I can spread the percent take-out by reducing headcount across my organization, but there must be a smarter way to handle this. I am not sure what to do, stated a participant at a recent Ernst & Young roundtable. Like many participants at the roundtable, operations executives across industry sectors believe they have squeezed as much cost from their operations as they can. And yet, to meet shareholder demands, finance executives are making aggressive performance promises that operations functions are expected to keep.

To achieve these results, operations executives need to fundamentally rethink what, how and where work gets done. They will need to reach beyond their own department, looking across the organization to understand how each business unit operates. By taking a more holistic view of business performance, operations executives can make transformational changes that will drive the improvements they seek.

But how?

The answer is broad. Operations executives are no longer simply focused on making organizations lean; they need to understand how they can use the operation function to guide better, smarter and faster decision-making across the organization. This will require a broader, all-encompassing view of the role that operations plays within the larger organization. This broad perspective will enable operations professionals to not only see whats going on within the organization now, but also to anticipate what is on the horizon so that companies will have a competitive advantage if and when budget challenges should emerge.

By closely aligning the business strategy with the supply chain, companies will have a better understanding of the impact that budget challenges have on their most important stakeholder the customer.

One of the ways in which the business strategy can become more closely aligned to the operations function is by putting together an effective plan for when budget challenges arise. In our experience, weve often seen operations executives allocate the cost take-out without a clear understanding of the consequences for both the business and the customer. By putting a plan into place that is part of the broader business strategy and addresses the needs of the customer, operations executives will be able to ensure that the impact of unplanned events, consequences or other supply chain stumbles are minimized.

Four Focus Areas

Each company is unique, and because of that there are no one size fits all solutions to preparing for supply chain issues. Nevertheless, there are four areas on which all organizations can focus:

1. Standardization and transparency

Regardless of the industry, every company faces the key challenge of improving or sustaining the quality and transparency of information across the enterprise. One critical step in improving the decision-making in the event of a supply chain stumble is to make the processes and governance around the changes of data a key priority. By standardizing operations processes at the global level, there is the potential for numerous benefits across a variety of functions in the organization; however, results can quickly be seen in the area of procurement. In taking this step, executives will have a greater transparency of spend. This is a key benefit of leveraging the scale of procurement globally.

Standardizing operating processes is one step towards restructuring the supply chain for greater visibility across geographies and job functions. In an effort to improve an organizations ability to gather real-time information that flows both up and down stream, operations executives should adopt an analytical perspective that enables them to survey performance across the entire supply chain and make the necessary improvements and changes in order to ensure that performance is being optimized.

It is possible to accomplish this by breaking down the functional silos to facilitate centralized reporting for greater cross-functional, cross-geography visibility.

Implementing internal policies that enhance transparency and promote standardization are critical for operations executive to drive business growth. Equally critical is the relationship with the customer operations executives need to think like their customers do to ensure that they are meeting demands and expectations.

2. Customer service 101

The customer is the most important relationship that an operations executive has; however, far too often, when making business decisions the customers needs are not considered. Instead, organizations typically tend to focus on logistics, procurement, manufacturing, planning, suppliers and services with a focus on the ask of the business.

Supply chain professionals need to look at supply chain operations from the perspective of the customer. While it seems so simple, the results of doing something like this can be extraordinary. By looking at the supply chain through the eyes of the customer, supply chain professionals are able to better understand if there are any systematic issues that prove problematic in terms of satisfying a particular customer demands. Making cuts without an agenda focused on customer expectations could make it challenging to keep those customers. This is customer service 101.

To take this one step further, organizations should look at how to guarantee that reliability and predictability are practiced not only in manufacturing but across the supply chain. These are crucial components to maintain both customer relationships and a strong brand within the respective industry. These components are essential to building a sustainably profitable business model; however, they do demand disciplined execution using focused strategies. These strategies should aim to improve manufacturing OEE, cost and quality by increasing production system reliability of current operations or evaluate opportunities to better align supply chain strategies with the overall business strategy.

Strong leadership engagement will help to define and build a culture and capabilities that sustain reliable operations. Additionally, working with your supplier community on reliability and predictability can offer additional gains as that may be the basis for driving incremental shared productivity gains.

A clear understanding of what the customer needs from its operations function is an important as it serves to build customer loyalty and trust. However, that understanding is nothing without a reliable and predictable supply chain that adds value to the business model.

3. The supplier

The supplier-operations relationship is vital in building a strong business strategy in the respect that by leveraging supplier relationships it becomes possible to reduce cost and improve innovation and flexibility.

Beyond cost negotiations, performance scorecards and operating reviews can drive significant benefits. These tools can be used to focus on ways to driver greater product innovation, reduce costs, minimize risks and understand operating drivers affecting how work gets done between your company and a select segment of suppliers. This information can drive top-line value and improve bottom-line performance.

Additional value may be found in exploring all non-core and core functions to identify opportunities for productivity improvements, cost reductions and increased strategic focus in certain functions. Essentially, this is the in-sourcing versus outsourcing discussion. What adds more value to your company?

In our experience, we find that a balanced focus on the costs with aligned performance and operating management criteria will help to ensure that short-gains do not become long-term cost increases. This is particularly problematic in outsourcing arrangements.

Visibility, standardization and the relationship with the customer and the supplier are key to developing a supply chain strategy that drives operations growth across the business. The final component to this plan is difficult to define but absolutely necessary the contingency plan.

4. The contingency plan

In planning for the unexpected, one must first release that everything in the operations function is related to demand. A stumble in the supply chain can change everything. Any issue can result in delivery delays to the customer, damage to the brand name and potentially shareholder value. Operations functions need to understand the pinch points that create uncertainty in the supply chain and will ultimately affect demand.

The development of an integrated business plan will enable supply chain professionals to address these points in a way that minimizes the impact on all stakeholders. When rationalizing costs, it is critical to have a solid supply chain intelligence platform that will take your supply chain performance to the next level.

A New Era

Supply chain has entered a new era. Executives are beginning to see supply chain operations as a strategic asset in improving the operational and financial performance of the organization. In response to this, operations executives need to put greater emphasis on reliability and predictability. They need to be able to gather all needed information for making choices in real time that absolutely minimize surprises for the organization. And, they need to plan for the unexpected.

Most important in this new age, operations executives need to play a bigger role in the development of the broader business strategy. As the economy continues to change, an organizations success will be increasingly contingent on the degree of alignment between its business strategies and its underlying supply chain capabilities.

Supply chain operations may not necessarily drive the formation of any fundamental value proposition. However, given its role in delivering on promises, it must also become more active in defining those promises. In effect, the supply chain should be defining how a company operates.

Brian Meadows serves as the Americas leader for Ernst & Youngs Supply Chain and Operations Advisory Services business. He has deep experience in supply chain operations both as a consultant and an operating executive covering the end-to-end supply chain.Most recently, he was senior vice president of supply chain & operations at Hospira, Nextel Communications and Sprint-Nextel Corp., where he led the integration of the supply chain operations of Sprint and Nextel.

Herb Schul is a principal in Ernst & Young LLPs Advisory Services practice. He has significant experience across a wide range of global clients in the manufacturing, automotive, and consumer products industries. Prior to joining Ernst & Young, Herb held multiple leadership and senior advisor roles within leading manufacturing and professional service organizations.

The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.